The Chinese pulled the trigger on the Graphite Crunch

ACCESSWIRE / February 13, 2015 / Gigafactories, an Energy Storage Boom and China Jumping to Secure More Graphite Tells us the Supply Crunch is On

A sudden move by a state-owned Chinese company shook the graphite market on Tuesday this week, sending the stock price of a medium-cap company up 13% since the news broke. Chinalco (3668.HK) announced an agreement with Australia's Syrah Resources (SYR:AX) for a 3-year contract to supply graphite. Syrah's Balama deposit in Mozambique has yet to go into production, due in 2016 – but 35% of its supply for the first three years in business is already sold. It tells a lot about the supply/demand interaction ahead, and it means large flake graphite deposits are going to be a hot commodity.

China Offline

The Chinese move was surprising. At present, the country is the world's largest producer of natural graphite, accounting for approximately 70% of total supply in 2014. That figure is down from 85% global supply just a year before, and supply is expected to drop to between 50-60% in the next 3-5 years, according to a report by Benchmark Mineral Intelligence. That's a sharp drop of an increasingly valuable mineral on the cusp of booming demand, in less than the time that it takes for a new born to reach elementary school. Supply lines will strain and the price of graphite will reflect that.

"(This)…confirms to us that the world's largest graphite producer is running out of graphite reserves at a time when demand for graphite appears certain to grow strongly. This Chinese customer appears no longer able to rely on Chinese domestic supply, but is seeking large tonnage of supply from outside China."

Canaccord Genuity Mining Analyst, Luke Smith

Part of the Chinese rush to secure more graphite is said to be the rising costs involved in the mining of the graphite at their disposal. The government has been on a crackdown for several years on unsafe mines and is still trying to get to grips with environmental pollution, not a situation to be taken lightly given the notorious smog that clouds major cities like Beijing.

Perhaps few stakeholders will be sad to see the Chinese stranglehold on world graphite supply diminish, as repeated, sudden mine closures over the past few years knocked significant supply lines offline on a whim. Manufacturers prefer more stable and diverse supply.

Electrifying Demand

Tesla. We all know that the electric car manufacturer has plans to take clean, green autos to the next phase by mass-producing lithium-ion batteries, leaving gas-guzzling, polluting vehicles in the dust. Construction of the US$5 billion colossus has already begun and is due to complete in 2020. But Tesla is thinking beyond the car, and now the home too. Home batteries are going into production in "about 6 months or so", CEO Elon Musk announced at an earnings call on Wednesday:

"We are going to unveil the Tesla home battery, the consumer battery that would be for use in people's houses or businesses fairly soon,"

Details are thin about the components involved for now, but it's surely going to involve more graphite.

The lithium-ion battery age is upon us. Yet the Achilles Heel of renewable power is the irregular delivery of energy. Some days the wind doesn't blow, some weeks there is no sun and not every day does the tide beat the shore with a strength that can be harnessed. The solution is going to be energy storage systems. It's about containing energy until it's needed.

Enter a furtive group called Alevo, which recently unveiled a solution unlike any other last October. The company showcased their GridBank energy storage unit, the result of a decade-long R&D project in Germany. It's essentially a shipping container filled with battery cells, each storing 2 megawatts of energy. Alevo says it has the solution to trim the estimated 30% electrical waste on the national grid and is planning on producing 200 MW of energy storage in 2015 at a new factory in Concord, North Carolina, US. It's the result of 10 years of R&D in Germany, seemingly kept under wraps to secure a competitive advantage in a crowded space.

The company recently secured US$1 billion in funding to roll out its ambition. Alevo got a unique chance to showcase their tech to the Obama administration in January, as part of a Swiss delegation invited to the White House to discuss investment opportunities. Clients include government agencies, from the EU to the Far East, with the company projecting the creation of 2,500 high-skilled jobs.

New Graphite Suppliers will be Approached

With all that demand, and Chinese graphite in eclipse, who will step up with new supply? There are a few new developing producers to watch out for. The graphite companies in the Australian junior index jumped in value by 120% to US$ 1.1 billion in 2014.Syrah Resources (SYR:AX) is one of them. Another is Graphite One (GPH.V). Their property at Graphite Creek in Alaska is the largest known, highest grade, large flake graphite deposit in the US. The mine has a lifespan that could well be 100 years - 4-times larger than any other known graphite deposit in North America. The grade at surface level averages 10%, which should prove economical to mine. A PEA is due Q2 2015 with a feasibility study to follow. Given Graphite Creek's location in a mining-friendly, zero political risk region like Alaska, with a variety of transportation options including sea, air and road, Graphite One has the potential to become a major player in the global graphite market.

Game On

The graphite crunch has already started. The move by Chinese company Chinalco was the trigger. That the world's largest producer of graphite, with tumbling production, China is signing on graphite properties before they even go into production is the surest sign that the game is on. Other mining juniors are sure to see increased interest in the near future.